Today’s News October 7, 2015

• Commodity Trading Giants Unleash Liquidity Scramble, Issue Record Amounts Of Secured Debt

  Earlier today, in its latest attempt to restore confidence in its brand and business model after suffering a historic stock price collapse, Glencore – whose CDS recently blew out to a level implying a 50% probability of default – released a 4 page funding worksheet which was meant to serve as a simplied summary of its balance sheet funding obligations and lending arrangements to equity research analysts who have never opened a bond indenture, and which among other things provided a simplied and watered-down estimate of what could happen if and when the company is downgraded to junk.

  Meanwhile, in a furious race to shore up as much liquidity as possible, Glencore – which a month ago announced a dramatic deleveraging plan – and its peers have been quietly scrambling to raise billions in secured funding. Case in point none other than Glencore’s biggest competitor and the largest independent oil trader in the world, Swiss-based, Dutch-owned Vitol Group, whose Swiss unit Vitol SA earlier today raised a record $8 billion in loans.

  It is not alone.

  As Bloomberg reports, another name profiled previously here, privately-held (but with publicly-traded debt) Trafigura  “won improved terms on a $2.2 billion loan refinancing deal on Oct. 1 via a group of 28 banks. Swiss commodity traders Gunvor Group Ltd. and Mercuria Energy Group Ltd. are also marketing credit facilities totaling $2 billion.”

  Louis Dreyfus Commodities, the world’s largest raw-cotton and rice trader, said in its interim report last month that it had six revolving credit facilities with staggered maturity dates totaling $3.3 billion. In June, it amended and extended its North American facilities totaling $1.6 billion and in July it refinanced a $400 million Asian lending facility with the company securing an option to request an increase of $100 million.

   

  Noble Agri, the agricultural commodity trader majority owned by China’s Cofco Corp., attracted four new lenders to its $1.58 billion one-year revolving credit facility, people familiar with the matter said this month.

  In short – a race against time to pledge as much unencumbered collateral as possible for future funding needs, because as every CEO knows you raise capital when you can, not when you have to. Yet this is odd, because even as the companies hold investor meetings and publicly comfort investors that they are adequatly funded and see no need for a liquidity-raising scramble, that’s precisely what the world’s commodity traders are doing.

  Bloomberg’s take was more optimistic: “The transactions show banks are still eager to loan money to commodity traders even after debt concerns caused by wild swings in Glencore’s stock and bond prices.”

  The new loans and refinancing signal banks are comfortable lending to commodity traders, whose business models allow them to profit from volatility and lower financing costs amid weaker prices for raw materials.

  According to Bloomberg, Vitol’s record credit facilities from a group of 57 banks were increased by a third after the initial $6 billion sought by the trading house was oversubscribed by $2.7 billion, the Rotterdam-based company said in a statement. The facilities, refinancing a debt package signed 12 months ago, are the biggest in the firm’s 49-year history, a Vitol spokeswoman in London said.

  Then comes even more spin:

  The loan package, coming after Trafigura last week agreed to lower lending rates, suggests some analysts don’t understand the business of trading houses, which can benefit from lower commodity prices and the current contango market structure that allows them to profit by storing oil because forward prices are higher than current costs.

  Actually analysts (at least credit) understand the business of trading houses very well; what Bloomberg’s reporters don’t seems to understand, however, is the principle of muturally assured megaleverage destruction, or the implied threat for a company’s secured lending syndicate that a borrower which already has billions of exposure to banks has all the leverage in demanding even more debt. After all, should Vitol fail, it would lead to a cascade of bank failures as all the banks that have lent money to the giant commodity trader are forced to charge off their exposure, in the process leading to serial defaults among undercapitalized financial institutions.

  It is these institutions whose credit officers underwrote the loans, that are the ones who “don’t understand the business of trading houses” because based on the recent collapse in publicly traded securities, they never modelled what happens to cash flows in a world in which the price of oil, copper,  zinc, aluminum or other commodities, suffer a 50%+ plunge in prices.

  “Given the recent turbulence in the commodities space, we have been repeatedly asked by investors on the banks’ exposure to commodity traders,” analysts at Sanford C. Bernstein led by Chirantan Barua wrote in a note Monday. 

  As they well should, and in order to avoid answering, the banks are perfectly happy to throw a little more good money after lots of bad money in order to avoid remarking their entire exposure to the sector to something resembling fair value.

  But the day of remarking is coming: as Bernstein calculates, commodity traders have raised at least $125 billion of debt, of which about $75 billion is loans. In other words, there is about $75 billion in secured debt, collateralized by either inventory and/or receivables collateral whose value has cratered in the past year, and as a result the LTV on the secured loans has soared. It is this that is prompting the panicked banks to be more eager to provide funds to the suddenly distressed energy-trading sector than even the borrowers themselves. And after all, if the banks do blow up, there is always the taxpayer-funded bailout as a last reserve.

  And here is a pop quiz to either analyst, or Bloomberg writers who don’t “understand the the business of trading houses” – if you issue secured debt to shore up liquidity as a result of what is fundamentally a massively overlevered capital structure, does the pro forma debt increase or decrease. This is not a trick question.

  The good news for the Vitols of the world is that by pledging even more of their unencumbered assets to banks, they buy themselves a few more months, or quarters, of liquidity to pay down upcoming maturities and interest. Which is what Glencore did with its “doomsday” plan in early September… a plan which calmed the stock for all of two weeks before investors saw right through it for what it was: a desperate scramble to put lipstick on a declining-stage supercycle pig.

  In the meantime, the end result is this: companies that are even more levered to commodity prices in a world in which at last check commodity prices, a proxy for China’s economy, are sliding. Which, incidentally, was our thesis in March of 2014 when we said that buying Glencore CDS is the best way to trade China’s hard landing. This is precisely what happened.

  Which is why both the companies, and their lending banks, better pray that commodity prices pick upin the coming weeks and months, becuase for the Vitols, the Glencores, the Trafiguras, the Mercurias and so on, that is all that matters. Ironically, by levering up even more, they bought themselves some time now, but if and when the next leg down in the commodity supercycle takes place, the pain will only be that much greater.

  

  

  

  

  

• The Two Major Factors That Will Drive Markets In Q4 According To SocGen (Spoiler: Not The Fed)

  In the aftermath of the Fed’s September fiasco, in which Yellen single-handedly cost the Fed years if not decades of carefully scripted “credibility”, and more than unleashing a selloff has gotten us to the point where even Tier 1 banks admit that “market participants have started to question the effectiveness of monetary policy, with good reason”, we were shocked to learn that at least according to Socgen, the Fed is no longer a major factor driving the market in the fourth quarter.

  Here is SocGen’s explanation of how the Fed lost credibility.

  Monetary policy: central banks take a back seat

   

  Last month, neither the ECB’s threat to expand its QE programme nor the delay in the Fed’s rate hike succeeded in stopping the equity sell-off. Market participants have started to question the effectiveness of monetary policy, with good reason. With still a large debt overhang in many developed economies, further easing is unlikely to boost credit demand significantly from current levels. Moreover, easy financial conditions have led to a growing divergence between modest global growth and frothy valuations. This divergence culminated earlier this year in an S&P 500 P/B ratio at 2.9x (a level last seen on the eve of the Great Recession): a correction was overdue. Although growth is expected to remain solid in developed economies, corporates are now facing external headwinds, against which central banks have limited tools.

  

   

  We can only hope that SocGen is right and that the Fed will no longer be a driving force for the market, but as everyone knows this is merely a pipe dream. If anything, the Fed – which will not hike rates in 2015 – is merely taking a sabbatical until next year, when it will be forced to decide between either delivering on its promise, or losing all credibility and going straight to NIRP/QE4+.

  So if not the Fed then what, according to SocGen, will be the two major drivers behind the stock market in the last quarter of 2015? The answer:

  1) China: to remain a headwind into 2016, but…

   

  EM and, especially, commodity-dependent economies have been severely impacted by China’s slowdown this year. With globalisation, developed and emerging economies have become more integrated, thereby raising concerns of spillover effects spreading from EM to DM economies. But, DM economies seem to have been left relatively unscathed so far. This is because DM growth is mainly driven by stronger domestic spending, notably owing to lower commodity prices and better employment prospects. China should continue to weigh on global growth into 2016. But, we expect Chinese activity to stabilise somewhat near term, mostly due to a greater focus on infrastructure investment. Any sign of growth stabilisation in China could alleviate fears of a global recession: watch China’s leading indicators closely in Q4.

   

  

  And:

  2) Earnings: strong divergence between sectors

   

  US EPS growth has been very disappointing this year, with Q3 earnings likely to decline (yoy) for the second quarter in a row. Our Equity Quant team notes that profits growth has never been this weak outside of a recession. Consequently, risk aversion has increased, reinforced by fears of contagion across asset classes and notably the return of idiosyncratic risk in credit. The external headwinds of a strong USD, lower commodity prices and slower global demand should continue to weigh on sectors such as industrials, materials and energy. But, lower oil prices and a healthier job market (with the current soft patch likely to be transitory) are positive for US consumers, as reflected by strong spending data over the past months (+0.4% mom on average). As a result, sectors exposed to US consumption could still report solid EPS growth going forward. The eurozone recovery should also support earnings, allowing the Euro Stoxx to benefit from less demanding valuation levels.

   

  

  If SocGen is right then enjoy the last day before Chinese stocks reopen after its week-long holiday. As for earnings season, if today’s atrocious announcements by Yum Brands and Adobe are any indication, then not even a “recovering” China, one paradropping billions in debt rescue packages on top of insolvent banks, will be able to offset the acute earnings recession about to unfold.

  

  

  

  

  

• Fortress Backs Hundred Million Dollar Subprime, Payday Lender Scheme: "He Has Peacock Feathers Tattooed Down His Left Arm"

  “I don’t hide tattoos, I don’t take earrings out. I just don’t do that, because ultimately if you don’t like who I am, you’re not going to like what I do.”

  Who knows what that is supposed to mean, but it’s a quote from Douglas Merrill who, as Bloomberg notes, “has peacock feathers tattooed down his left arm, black fingernail polish, [and] chin-length hair.”

  Two other things Douglas has are a Ph.D. in cognitive science from Princeton and the online version of a payday lender called ZestFinance. 

  Now make no mistake, payday lenders are bad because what they do is trap low-income households in a perpetual debt cycle and they do it in the name of providing credit to those who wouldn’t normally have access to it.

  In other words: the pitch is that before you think about criticizing a payday lender for charging an APR that amounts to 30%, you should actually think about whether you should be praising them for helping America’s downtrodden debt serfs get into still more debt. 

  Of course we’re employing quite a bit of trademark sarcasm here. Payday lenders have been proven time and again to be largely predatory in nature, capitalizing off of the desperation of poor people albeit with a business model that comes with substantial risk because.. well… because the business model depends on collecting interest payments from those same poor people who have just been made poorer-er-er by the fact that they took out yet another loan they most certaintly can’t afford to service. 

  Anyway, Fortress is ready to jump in on this to the tune of hundreds of millions:

  “I don’t lie about who I am,” [Merrill] said in an interview from the startup’s headquarters among the pawn shops and souvenir stores on Hollywood Boulevard in Los Angeles. “I don’t hide tattoos, I don’t take earrings out. I just don’t do that, because ultimately if you don’t like who I am, you’re not going to like what I do.”

   

  The funding from Fortress, which manages about $72 billion, will help ZestFinance make more of its Basix installment loans, which are capped at $5,000, last as long as three years and carry annual rates of up to 36 percent. Borrowers often use the money to consolidate credit-card debt or pay for medical expenses, Merrill said.

   

  His unusual appearance in the financial world is a luxury he can afford. ZestFinance is among a crop of startups leading a technology-driven push to make lending easier and cheaper. Wall Street firms and other large institutional money managers have taken note, writing big checks to participate in the fast-growing businesses.

   

  Avant Inc., one of ZestFinance’s competitors, said last week that it had raised $325 million from investors including private-equity firm General Atlantic and JPMorgan Chase & Co. Social Finance Inc., which helps borrowers from elite colleges consolidate student debt, said a day later that it raised $1 billion from investors including Japan’s SoftBank Group Corp. and affiliates of Dan Loeb’s hedge-fund firm Third Point LLC.

   

  ZestFinance gained notoriety in recent years for its approach to underwriting some of the most challenging borrowers. By sifting through oceans of data, Merrill and his colleagues created models that are being used to provide an online alternative to payday loans. Still, they’re not cheap: Some carry annual percentage rates of as high as 390 percent.

  Right.

  What could possibly go wrong here?

  Here’s a guy with a PhD lending money provided by a firm whose cost of capital is basically zero to borrowers whose credit is terrible and these loans carry APRs that approach 400%. 

  Let’s call this what it is: this is just nonsense and what will end up happening is that these loans will end up in the collateral pool of a CDO at some point and the very same hedge funds and PE houses that are providing the financing will end up betting against the loans they effectively made in a hilarious Abacus CDO redux that mainstreet with neither care about, remember, nor understand, which will be great news for Merrill and Wall Street because that means they can continue to perpetuate the business model.

  
  

  

  

  

  

  

• Is Russia Plotting To Bring Down OPEC?

  Submitted by Dalan McEndree of OilPrice

  Is Russia Plotting To Bring Down OPEC?

  President Putin’s recent moves in the Middle East—to shore up Bashar al-Assad’s regime in Syria through deployment of combat aircraft, equipment, and manpower and build-out of air-, naval-, and ground-force bases, and the agreement in the last week with Iran, Iraq, and Syria on intelligence and security cooperation—could contribute to Russian efforts to combat the myriad negative pressures on Russia’s vital energy industry.

  Live by Energy…

  Energy is the foundation of Russia, its economy, its government, and its political system. Putin has highlighted on various occasions the contribution Russia’s mineral wealth, in particular oil and natural gas, must make for Russia to be able to sustain economic growth, promote industrial development, catch up with the developed economies, and modernize Russia’s military and military industry.

  Even a casual glance at the IMF’s World Economic Outlook statistics for Russia shows the tight correlation since 1992 between GDP growth on the one hand and oil and gas output, exports, and prices on the other (economic series available here). According to the IMF’s 2015 Article Iv Consultation-Press Release and Staff Report, published August 3, oil and natural gas exports comprised 65 percent of exports, 52 percent of the Federal government budget, and 14.5 percent of GDP in 2014. Including their domestic contribution, hydrocarbons represent ~30 percent of GDP.

  While oil and natural gas are crucial to Russia, Russia’s crude and natural gas are crucial to its neighbors on the Eurasian landmass. Russia supplied about 30 percent (146.6 bcm) of Europe’s natural gas in 2014, and about 25 percent of its crude (3.5 mmbbl/day) in 2013. Russia’s oil and natural gas are also important to its Asian and Central Asian neighbors.

  It is not only the commodities that make Russia crucial, but its massive land-based infrastructure for their distribution throughout the Eurasian landmass. As Tatiana Mitrova, head of the oil and gas department, Energy Research Institute, Russian Academy of Sciences, pointed out regarding natural gas in The Geopolitics of Russian Natural Gas:

  “Russia has a unique transcontinental infrastructure in the heart of Eurasia (150,000 km of trunk pipelines), which also makes it a backbone of the evolving, huge Eurasian gas market (which could include Europe, North Africa, the Commonwealth of Independent States (CIS), Caspian Sea region, and Northeast Asia). Control over the transportation assets in this region together with vast gas reserves make Russia the key element of this new market.”

  The land-based oil distribution network is smaller, but also important. The 4,000 km Druzhba pipeline delivers about 1 mmbbl/day of crude to Europe—about 30 percent of total shipments to Europe. In the Far East, Rosneft shipped 22.6 million tons of crude to China in 2014 through the East Siberian Pacific Ocean (ESPO) pipeline.

  The Russian government continues to seek to extend and expand the natural gas distribution infrastructure—into Europe, with various proposed pipeline projects (Nord Stream 2, Turkish Stream 2, 3, and 4, South European Pipeline), and into China, with two large pipeline projects, Power of Siberia Pipeline (to supply China from East Siberia), and the proposed Altai pipeline (to supply China from West Siberia).

  …Death by Energy

  In the last few years, the threats to Russia’s energy industry have multiplied and intensified. They pose an existential threat to the industry and therefore to the Russian economy:

  – The revenues Russia can earn from its crude and natural gas exports face intense pressure. The Saudi decision to let the market set prices and to pursue market share, has led to steep declines in crude and petroleum product prices. The decision also has impacted natural gas export prices negatively, since, for Russia’s long-term supply agreements, they wholly or partially are indexed to oil prices. The transition in Europe to hybrid natural gas pricing models (which take European spot hub prices into account) also has pressured natural gas pricing. (Natural gas data from Gazprom).

  

  (Click to enlarge)

  Adding to the revenue pain, natural gas export volumes have been falling, according to Gazprom (which has a monopoly on pipeline exports), as have domestic volumes within Russia:

  

  (Click to enlarge)

  It is therefore not surprising that the aforementioned IMF Article Iv Consultation-Press Release and Staff Report projected sharp declines in 2015 and 2016 from 2014 levels for oil export revenues ($109.8 billion and $96 billion respectively) and natural gas export revenues ($12 billion and $14.3 billion respectively).

  

  (Click to enlarge)

  Since these IMF projections are based on $60.1 and $65.8 per barrel prices in 2015 and 2016, oil export revenues will undershoot these pessimistic IMF projections, as crude prices are projected to stay below $60 through 2016 (EIA estimates for Brent are $54.07 and 58.57 in 2015 and 2016 respectively).

  – The U.S. and European Union’s decisions to impose—and maintain—sanctions on Russia after its invasion and annexation of Crimea and invasion and informal annexation eastern Ukraine will pile more pressure on the Russian energy industry. They include bans on financing for and the supply of critical equipment and technology to important Russian energy projects. Novatek and its partners Total and Chinese National Petroleum Company still lack $15 billion of the $27 billion needed to finance the Yamal LNG plant. Denis Khramov, Russia’s deputy Minister of Natural Resources, said September 28 at a conference in Russia’s Far East that Rosneft and Gazprom are delaying some offshore drilling by two to three years because of sanctions and low oil prices. The sanctions are also impeding Gazprom’s ability to develop the Chayandinskoye and Kovyktinskoye fields in eastern Siberia, from which it plans to supply natural gas to China under the bilateral $400 billion, thirty year deal signed in 2014.

  – Following the Russian invasion of Crimea and eastern Ukraine, The European Union is now even more determined to reduce its dependence on Russia for natural gas and to force Gazprom submit to EU competition rules. Europe has sought and continues to seek alternatives Russian natural gas (among them, U.S. LNG and Iranian pipeline and/or LNG). The European Commission, the European Union’s executive body, has refused to bless Gazprom’s proposed 55 bcm/year Nord Stream 2 natural gas pipeline project, citing existing surplus Gazprom pipeline capacity into Europe and insufficient future demand for Russian natural gas. Also, the EU Commission in April charged Gazprom with violating the EU’s anti-trust laws for anti-competitive practices and unfair pricing in Central and Eastern Europe. If found guilty, Gazprom could face substantial fines of around $1 billion. Even if Gazprom avoids fines and manages to reach a settlement with the EU, as it hopes to do, its European market share and pricing will remain under pressure into the future.

  – The emergence of the U.S., along with Canada, as powerful crude, NGL, and natural gas producers is also a major concern for the Russian economy. This has transformed the U.S. from a market for Russian crude and natural gas (via LNG) to a global competitor. If, as seems increasingly likely, the ban on crude exports is lifted, U.S. crude will compete with Russian crude in several key markets. It would also force foreign suppliers to seek other markets for all or part of the exports they previously sent to the U.S. This in turn would intensify competition among these crude exporting countries for share in those markets. In regard to natural gas, its explosive output growth in the U.S. undercut Gazprom’s rationale for its Baltic LNG project (10 mtpa), turned the U.S. into a major (potential) LNG competitor in global LNG import markets, and, via the U.S. toll- and Henry Hub- pricing model, weakened Gazprom’s ability to insist on oil-indexed, long-term contracts.

  Saving Russian Energy (and Russia) through the Middle East?

  Putin’s moves in the Middle East could help Russia address the impact of these threats to the Russian energy industry. They potentially enhance the attractiveness of Russian crude and natural gas supplies compared to those from Saudi Arabia and its Gulf Arab allies.

  In the selection of crude and natural gas suppliers, security is a key consideration for importers. Wary of U.S. naval power, the Chinese, for example, prefer pipeline natural gas supplies over seaborne LNG supplies. Importers therefore must take into consideration the potential threats to transport. In this critical area, Russia enjoys a decided advantage over Saudi Arabia and the Gulf Arab producers, which depend on sea transport through the Persian Gulf and the Red Sea to ship their oil and LNG.

  Each of the three routes from these two bodies of water passes through a “choke point” (from the Red Sea, through the Suez Canal to Europe and through the Mandeb Strait to Asia, from the Persian Gulf through the Strait of Hormuz). By adding an airbase to their military presence in Syria, the Russians—coordinating with Iran, Syrian President Assad, and eventually possibly Iraq—would have the capability to disrupt shipments from Persian Gulf and Red Sea terminals.

  Russia’s export channels are less susceptible to disruption. With the exception of LNG exports to Asia from Sakhalin, Russia sends natural gas to its customers via pipeline. About 70 percent of Russia’s seaborne oil exports are susceptible to choke points (shipments from two ports on the Gulf of Finland through the Baltic Sea to the Atlantic and one port on the Black Sea through the Turkish Strait/Bosporus to the Mediterranean), while 30 percent are not (pipeline shipments to Europe and ESPO pipeline shipments to the port of Primorsk near Vladivostok).

  Putin’s moves also are strengthening Russia’s influence with OPEC. Russia already has extensive and close ties with Iran and Venezuela, and is now laying the basis for such ties with Iraq. Putin has aligned Russia with OPEC’s have nots–the members lacking financial resources to withstand low crude prices for an extended period and that have objected to Saudi policies (Iran, Iraq, Angola, Nigeria, Libya, Algeria, Ecuador, and Venezuela)—against the haves (Saudi Arabia, Kuwait, the UAE, and Qatar). He has continually supported Venezuelan President Maduro’s calls for an emergency OPEC meeting on prices and his efforts to persuade Saudi Arabia to reverse its policy. Most recently, in the beginning of September, Putin told Maduro that the two countries “must team up to shore up oil prices”.

  In addition, Russia’s deputy prime minister in charge of energy policy, Arkady Dvorkovich, in the beginning of September made comments that, in tone and substance, mocked Saudi policy, saying that “OPEC producers are suffering the ricochet effects of their attempt to flush out rivals by flooding the world with excess output,” expressing doubt that OPEC members “really want to live with low oil prices for a long time,” and implying that Saudi policy is irrational.

  Indeed, Russia can be seen as maneuvering to split OPEC into two blocs, with Russia, although not a member, persuading the “Russian bloc” to isolate Saudi Arabia and the Gulf Arab OPEC members within OPEC. This might persuade the Saudis to seek a compromise with the have nots.

  A strategic alliance with Iran and Iraq offers Putin two more potential avenues to pressure the Saudis. They can test Saudi determination to defend their market share at any price and its wherewithal financially to do so. Iran claims it can raise crude output by one million barrels within six or so months of the lifting of sanctions. The Saudis may be calculating that Iran must first rehabilitate its oil fields and that Iran, cash poor, cannot do so quickly. If this is the case, Russia could step in, offer Iran financing, and force the Saudis to contemplate prices staying lower longer than they anticipated and therefore continuing pressure on their economy.

  Russia also could cooperate with Iran and Iraq to take market share from Saudi Arabia in the vital Chinese market. As a recent Bloomberg article pointed out, Saudi Arabia, Iran, Russia, Iraq and other countries are vying intensely for sales to China, the second largest import market and the major source of demand growth in coming years. Coordinating their pricing and consistently offering the Chinese prices below the Saudi price, they could seek to win market share. Such a price war would pressure the competitors’ currencies.

  Since the Russians allow the Ruble to float, Iran maintains an informal and unofficial peg for its Rial to the US$, and Iraq has indicated it is willing to adjust its peg if necessary, while the Saudis are committed to the Riyal’s peg to the US$, Russia, Iran, and Iraq would have any advantage over Saudi Arabia. To the extent that Iran and Iraq allowed their currencies to adjust, Russian, Iranian, and Iraqi revenues in local currency terms would not decline as much as Saudi revenues fixed in US$ (and might even increase) as their currencies depreciated.

  Results

  Each of these opportunities offers the possibility to address the pressures on the Russian energy industry. However, Putin will have to play his cards carefully. Played heavy-handedly, he could intensify fears in Europe of excessive dependence on Russian energy supplies and awaken such fears in China. This could lead the Europeans and Chinese to search for other suppliers. In addition, mismanaged confrontation with the U.S. and Europe in and over Syria could lead to broadening and strengthening of economic and financial sanctions. Moreover, neither Iran nor Iraq will want to become overly dependent on Russia, which lacks the resources they need develop their energy industries.

  Finally, the opportunities assume Putin’s gambits in Syria and with Syria, Iran, and Iraq in intelligence and security cooperation will succeed. And this, given the Soviet experience in Afghanistan and Putin’s experience in eastern Ukraine, is far from certain.

  

  

  

  

  

• A "Heroic" Ben Bernanke Blames Congress For Poor Economic Recovery

  Make no mistake, Ben Bernanke is a “courageous” guy. 

  When the world was on the verge of collapse in 2008 thanks in no small part to the post dot-com bubble policies of his predecessor, the former Fed chair wants you to know that he did what was needed to save the world and he will tell you all about it in his new memoir “The Courage To Act”, which can be yours on Kindle for the weird price point of just $16.05 (or, in unconventional monetary policy terms, about a QE millisecond).

  Of course perhaps more than any other post-crisis DM central banker, Bernanke has a lot of explaining to do. That is, it isn’t immediately clear why, if Ben wants to contend that the Keynesian dominoe effect he set off in 2008 is such a success, that inflation expectations are still mired in the deflationary doldrums in Japan and Europe and why global demand and trade are stuck at stall speed.

  Of course what you do if you’re a Keynesian central planner in today’s low-growth world is blame lawmakers because after all, when monetary policy fails to bring about the promised defibrillator shock to global demand, you can always pin the whole debacle on an ineffective legislature. Here’s FT with Bernanke’s take:

  The former chairman of the Federal Reserve has hit out at Congress for failing to do its part to bolster America’s rebound from the financial crisis, saying the US central bank had been unfairly criticised when the recovery “failed to lift all boats”.

   

  In his newly published memoir, Ben Bernanke admitted the Fed had failed to spot some of the dangers building before the financial crash, and said that the controversial rescues of Bear Stearns and the insurance company AIG had damaged its political standing and “created new risks to its independence”.

   

  As suggested by the title of his book, The Courage to Act, Mr Bernanke argues that the Fed’s policies under his leadership were justified and helped usher in a stronger recovery than in many other countries. He draws a sharp contrast with the euro area, where monetary and fiscal policies had been “much tighter than demanded by economic conditions,” helping explain the miserable recovery in that economic bloc.

   

  
  

   

  Mr Bernanke levels frequent criticism at Congress in the book, calling for less confrontation and implicitly contrasting the bitter partisanship on Capitol Hill with a collegiate, consensus-building approach within the Fed.

   

  The publication come as Congress struggles to reach agreement on budget plans that would ensure highway building is funded and avoid a punishing fiscal clampdown after temporary spending measures lapse in December.

   

  Mr Bernanke writes: “The Fed can support overall job growth during an economic recovery, but it has no power to address the quality of education, the pace of technological innovation, and other factors that determine if the jobs being created are good jobs with high wages.

   

  “That’s why I often said that monetary policy was not a panacea — we needed Congress to do its part. After the crisis calmed, that help was not forthcoming. When the recovery predictably failed to lift all boats, the Fed often, I believe unfairly, took the criticism.”

  Fortunately for Bernanke’s successors at the Fed, there are now plenty of loud calls for monetary policy and fiscal policy to be merged which means that no longer will “heroes” like Ben have to worry about recalcitrant lawmakers, they’ll simply be able to order the issuance of bonds which they themselves will purchase, and as absurd as you might think that sounds, it’s where things are headed because as we outlined last month, it now looks like “they” are actually going to go “there” with the helicopter money drops. It’s just too bad Ben isn’t around to preside over the insanity.

  

  

  

  

  

• Putin Has Just Put An End to the Wolfowitz Doctrine

  4-Star General Wesley Clark noted:

  In 1991, [powerful neocon and Iraq war architect Paul Wolfowitz] was the Undersecretary of Defense for Policy – the number 3 position at the Pentagon. And I had gone to see him when I was a 1-Star General commanding the National Training Center.

   

  ***

   

  And I said, “Mr. Secretary, you must be pretty happy with the performance of the troops in Desert Storm.”

   

  And he said: “Yeah, but not really, because the truth is we should have gotten rid of Saddam Hussein, and we didn’t … But one thing we did learn [from the Persian Gulf War] is that we can use our military in the region – in the Middle East – and the Soviets won’t stop us. And we’ve got about 5 or 10 years to clean up those old Soviet client regimes – Syria, Iran, Iraq – before the next great superpower comes on to challenge us.”

  (Skip to 3:07 in the following video)

   

  The hawks overthrew Soviet allies Iraq and Libya.

  And they’ve been pushing for regime change in Syria for years.

  By bombing Isis, Al Nusra and other jihadis in Syria who are focused on overthrowing Russian ally Assad, Putin has put an end to the Wolfowitz doctrine.

  

  

  

  

• NYSE Short Interest Surges To Record, Pre-Lehman Level

  There are two ways of looking at the NYSE short interest, which as of September 15 surged by 1.4 billion to 18.4 billion shares or just shy of the level hit on July 31, 2008:

  • Either a central bank intervenes, or a massive forced buying event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs, or
  • Just as the record short interest in July 2008 correctly predicted the biggest financial crisis in history and all those shorts covered at a huge profit, so another historic market collapse is just around the corner.

  

  The correct answer will be revealed in the coming weeks or months.

  Source: NYSE

  

  

  

  

  

• How Developed Markets Become Banana Republics: "Debt Is A Much Easier Way To Gather Consensus"

  Perhaps the most dangerous thing about where the world seems to be headed now that central bankers have not only lost credibility in the minds of investors, but in their own minds as well, is that it’s not entirely clear what will happen to society if credit suddenly dries up. 

  That is, if the central bank put finally disappears and the market is once again free to purge speculative excess and correct the rampant misallocation of capital, the days of easy money will quickly come to an end as rational actors begin to make decisions based on prudence and fundamentals rather than on the assumption that because the cost of capital is effectively zero, and because central planners will never “allow” the system to fail, credit can safely be extended to unworthy borrowers. 

  We’ll likely get an early indication regarding the market’s tolerance for a return to some semblance of normalcy in the coming months as capital markets become less forgiving towards the exceedingly uneconomic US shale space. But as mentioned above, the truly interesting question is what happens when everyone else starts to get the bankrupt shale driller treatment because after all, in a world where everybody is living on cheap credit, metaphorically speaking we’re all just broke US oil producers, surviving on debt and the willingness of our neighbors to finance that debt. 

  It’s against that backdrop that we bring you the following excerpts from RBS’ Alberto Gallo, whose latest note takes a look at the history and proliferation of the fiat regime.

  *  *  *

  From RBS

  Bretton Woods ended shortly after (1971), while Fannie, Freddie and various other programmes that followed marked the gradual change to a monetary system based on fiat currencies, and later on, on fiat credit. 

  

  The use of government subsidies to encourage private borrowing to purchase a house, a car, or any other goods was since then imitated in other developed countries. It was the start of the so-called let-them-eat-credit policies and the transformation of democracies into debt-based democracies. No government, wrote now RBI Governor Rajan, prefers the tough reality of declining growth or of a crisis. Debt is a much easier way to gather consensus, and to postpone structural issues.

  
  

  “Politicians are resourceful people. Their political skill lies partly in proposing solutions that keep their constituents happy without venturing into the rocky terrain of real reform. In the case of inequality, politicians know intuitively that households ultimately care most about their consumption over time; incomes are only a means to obtaining that consumption stream. A smart politician can see that if somehow the consumption of middle-class householders keeps rising, if they can afford a new car every few years and the occasional exotic holiday, and best of all, a new house, they might pay less attention to their stagnant monthly paychecks. And one way to expand consumption, even while incomes stagnate, is to enhance access to credit.”

  *  *  *

  For now, we’ll forgive the fact that that quote comes from a central banker that just days ago slashed rates by 50 bps in an epic dovish lean that surprised 51 out of 52 economists and simply note that the dynamic described above is exactly how a developed, powerhouse economy gradually becomes a banana republic and if EM continues to follow this blueprint, the roundtrip from frontier market to investment grade and then back to frontier “junk” won’t take long. 

  

  

  

  

  

• The Trans-Pacific Partnership: Permanently Locking In The Obama Agenda For 40% Of The Global Economy

  Submitted by Mike Snyder of End of the American Dream

  

  We have just witnessed one of the most significant steps toward a one world economic system that we have ever seen.  Negotiations for the Trans-Pacific Partnership have been completed, and if approved it will create the largest trading bloc on the planet.  But this is not just a trade agreement.  In this treaty, Barack Obama has thrown in all sorts of things that he never would have been able to get through Congress otherwise.  And once this treaty is approved, it will be exceedingly difficult to ever make changes to it.  So essentially what is happening is that the Obama agenda is being permanently locked in for 40 percent of the global economy.

  The United States, Canada, Japan, Mexico, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam all intend to sign on to this insidious plan.  Collectively, these nations have a total population of about 800 million people and a combined GDP of approximately 28 trillion dollars.

  Of course Barack Obama is assuring all of us that this treaty is going to be wonderful for everyone…

  In hailing the agreement, Obama said, “Congress and the American people will have months to read every word” before he signs the deal that he described as a win for all sides.

   

  “If we can get this agreement to my desk, then we can help our businesses sell more Made in America goods and services around the world, and we can help more American workers compete and win,” Obama said.

  Sadly, just like with every other “free trade” agreement that the U.S. has entered into since World War II, the exact opposite is what will actually happen.  Our trade deficit will get even larger, and we will see even more jobs and even more businesses go overseas.

  But the mainstream media will never tell you this.  Instead, they are just falling all over themselves as they heap praise on this new trade pact.  Just check out a couple of the headlines that we saw on Monday…

  • Time Magazine: “Pacific Trade Deal Is Good for the U.S. and Obama’s Legacy”
  • The Washington Post: “The Trans-Pacific Partnership is a trade deal worth celebrating”

  Overseas it is a different story.  Many journalists over there fully recognize that this treaty greatly benefits many of the big corporations that played a key role in drafting it.  For example, the following comes from a newspaper in Thailand…

  You will hear much about the importance of the TPP for “free trade”.

   

  The reality is that this is an agreement to manage its members’ trade and investment relations — and to do so on behalf of each country’s most powerful business lobbies.

  These sentiments were echoed in a piece that Zero Hedge posted on Monday…

  Packaged as a gift to the American people that will renew industry and make us more competitive, the Trans-Pacific Partnership is a Trojan horse. It’s a coup by multinational corporations who want global subservience to their agenda. Buyer beware. Citizens beware.

  The gigantic corporations that dominate our economy don’t care about the little guy.  If they can save a few cents on the manufacturing of an item by moving production to Timbuktu they will do it.

  Over the past couple of decades, the United States has lost tens of thousands of manufacturing facilities and millions of good paying jobs due to these “free trade agreements”.  As we merge our economy with the economies of nations where it is legal to pay slave labor wages, it is inevitable that corporations will shift jobs to places where labor is much cheaper.  Our economic infrastructure is being absolutely eviscerated in the process, and very few of our politicians seem to care.

  Once upon a time, the city of Detroit was the greatest manufacturing city on the planet and it had the highest per capita income in the entire nation.  But today it is a rotting, decaying hellhole that the rest of the world laughs at.  What has happened to the city of Detroit is happening to the entire nation as a whole, but our politicians just keep pushing us even farther down the road to oblivion.

  Just consider what has happened since NAFTA was implemented.  In the year before NAFTA was approved, the United States actually had a trade surplus with Mexico and our trade deficit with Canada was only 29.6 billion dollars.  But now things are very different.  In one recent year, the U.S. had a combined trade deficit with Mexico and Canada of 177 billion dollars.

  And these trade deficits are not just numbers.  They represent real jobs that are being lost.  It has been estimated that the U.S. economy loses approximately 9,000 jobs for every 1 billion dollars of goods that are imported from overseas, and one professor has estimated that cutting our trade deficit in half would create 5 million more jobs in the United States.

  Just yesterday, I wrote about how there are 102.6 million working age Americans that do not have a job right now.  Once upon a time, if you were honest, dependable and hard working it was easy to get a good paying job in this country.  But now things are completely different.

  Back in 1950, more than 80 percent of all men in the United States had jobs.  Today, only about 65 percent of all men in the United States have jobs.

  Why aren’t more people alarmed by numbers like this?

  And of course the Trans-Pacific Partnership is not just about “free trade”.  In one of my previous articles, I explained that Obama is using this as an opportunity to permanently impose much of his agenda on a large portion of the globe…

  It is basically a gigantic end run around Congress.  Thanks to leaks, we have learned that so many of the things that Obama has deeply wanted for years are in this treaty.  If adopted, this treaty will fundamentally change our laws regarding Internet freedom, healthcare, copyright and patent protection, food safety, environmental standards, civil liberties and so much more.  This treaty includes many of the rules that alarmed Internet activists so much when SOPA was being debated, it would essentially ban all “Buy American” laws, it would give Wall Street banks much more freedom to trade risky derivatives and it would force even more domestic manufacturing offshore.

  The Republicans in Congress foolishly gave Obama fast track negotiating authority, and so Congress will not be able to change this treaty in any way.  They will only have the opportunity for an up or down vote.

  I would love to see Congress reject this deal, but we all know that is extremely unlikely to happen.  When big votes like this come up, immense pressure is put on key politicians.  Yes, there are a few members of Congress that still have backbones, but most of them are absolutely spineless.  When push comes to shove, the globalist agenda always seems to advance.

  Meanwhile, the mainstream media will be telling the American people about all of the wonderful things that this new treaty will do for them.  You would think that after how badly past “free trade” treaties have turned out that we would learn something, but somehow that never seems to happen.

  The agenda of the globalists is moving forward, and very few Americans seem to care.

  

  

  

  

  

• Russian Embassy Trolls Saudi Arabia On Twitter

  As regular readers and foreign policy critics the world over are no doubt acutely aware, the US, Saudi Arabia, Qatar, and Turkey have gotten themselves in a bit of a quagmire in Syria and Moscow has been keen on pointing it out. Still, The Kremlin has thus far observed some semblance (and we do emphasize the word “some”) of decorum in criticizing the West’s approach as Moscow has generally confined its scolding to what at least seem like serious foreign policy critiques. 

  That just went out the window – Russia is now openly mocking Riyadh, Doha, and Washington and as if the following weren’t brazen enough as it stands, note that it emanates from the UAE… 

  Find the right #Syrian rebel to arm – non-trivial task to start your day with | #Syria #????? #ISIL #Nusra #???? pic.twitter.com/Gc60dVAn7D

  — Russian Embassy, UAE (@RusEmbassyUAE) October 5, 2015

  

  

  

  

  

• The Phrase That Launches Recessions

  Submitted by Pater Tenenbrarum of Acting Man

  It Can’t Get Any Worse?

  On Friday, shortly after the release of the payrolls report, we asked half in jest whether the time had finally come for the market to interpret bad news as bad news, and not as an opportunity to speculate on more central bank largesse. As someone remarked to us later: “You had to ask”.

  

  Photo credit: Paul Cross

   

  Apparently a slightly later released news item informing us that “factory orders hit the skids” was taken as a buy signal of the “it can’t get any worse” sort. Normally it is considered bullish when the market rises on ostensibly bad news – and very often, this is actually the correct interpretation of such market action. However, one must be careful when the fundamental backdrop is subject to severe deterioration. Readers may recall that commentary on the markets was brimming over with the same type of argument in late 2007 and early 2008. In October 2007, the market in its unending wisdom priced the shares of Fannie Mae at $73 for instance.

   

  

  SPX, 10 minute chart – after initially sliding on Friday, the market quickly recovered and has rallied quite a bit since then 
  click to enlarge.

   

  The point is this: Although as a trader one must always respect market action, especially in the short term, one must at the same time avoid to ascribe to the mass of market participants a degree of wisdom they simply don’t possess. The market very often “knows” nothing and frequently tends to get things completely wrong. If that were not so, there would never be any buying or selling opportunities, but plenty of those obviously exist.

   

  The “Throwing of the Light Switch”

  Anyway, over the weekend we caught up a little on our reading, and inter alia came across an article at Wolfstreet a friend had pointed out to us, which discusses the recent weakness in US manufacturing data.

  What struck us was a comment made by the CEO of a manufacturing company in the context of the latest Kansas manufacturing survey release. As Wolf street notes, according to the survey, “the future composite index and the indexes for the future production, shipments, and new orders all dropped to their worst levels since 2009”. Here is what the CEO said:

  “It feels like someone just flipped the switch to ‘off’ without any concrete reasoning,” one of the executives commented.

  (emphasis added)

  We immediately recognized that phrase – we have heard it twice before, and it has stuck with us ever since. In fact, we have mentioned it a few times when occasion demanded in past articles. The first time we heard this phrase was in late 2000, in an interview with the CEO of a telecom equipment provider. Paraphrasing: “It’s as if someone had just thrown a light switch – orders have suddenly disappeared”.

  The next time we heard the phrase uttered was in late 2007 – this time in connection with a mortgage credit company. Ever since, we have filed it away as an anecdotal reference to the onset of recessions. And lo and behold, the phrase is popping up again in a district manufacturing survey.

  Over the weekend we also looked at the latest EWI financial forecast (a monthly publication focused on US markets). In one section, the authors discuss the recent prevalence of individual stocks and corporate bonds crashing even while the market as a whole seems to be holding up relatively well. They also ponder whether certain corners of the bond market that are lately attracting funds from those fleeing the junk bond market for their perceived safety are really as safe as is widely assumed. The following turn of phrase stood out to us in this context:

  “Our view is that Glencore’s “flash crash” will turn out to be one of many “light-switch” declines, and not just in commodity-related businesses. Already, a plethora of stocks in a wide range of industries have quietly crashed over 50% this year. The industries range from specialty retail (Aeropostale, -78%) to coffee (Keurig Green Mountain, -67%) to semiconductors (Micron Technology, -61%) and the Internet (Groupon, -61%).”

   

  [and further below, in the discussion of corporate debt]:

   

  “As the charts of Glencore’s stock and its credit default swaps illustrate, the “light switch” moments are starting to appear.”

  (emphasis added)

  So there you have the same phrase again, only this time in connection with financial market behavior. As the accompanying chart shows, junk bond spreads are exhibiting a distinct similarity to how they looked just ahead of the most recent recessions and bear markets:

   

  

  Junk bond spreads with a proposed wave count by EWI – click to enlarge..

   

  This synchronicity in this turn of phrase is of course not a coincidence – both the sudden disappearance of manufacturing orders and the “quiet flash crashes” of individual stocks from a wide range of industries coupled with persistent weakness in junk bonds, are symptoms of the same underlying phenomenon.

  Conclusion

  When we see the phrase about a “light switch suddenly being flipped to ‘off’” or a variant thereof popping up in reports about the economy or descriptions of market behavior, our ears are perking up. Admittedly, a sample of two is not exactly the mother of all sample sizes. Then again, anecdotal evidence is by its nature not statistical, but rather reflects the perceptions of people, in this case people intimately involved with the underlying businesses or markets.

  We tend to believe that such evidence is actually important. Both in 2000 and 2007 we encountered this phrase shortly after the stock market (in the form of the S&P 500) had put in an all time high or a retest of an all time high. Even the very first time in 2000 it struck us as significant. The reason in this case was that only half a year earlier, there had been much talk of “equipment shortages” and even (hold on to your hat ) “DRAM shortages”.

  When manufacturers see their orders suddenly dry up, something is very wrong in the economy already (note also, this tends to happen before any material effects on employment become evident. A sudden rise in initial claims would definitely cinch it). In light of this, stock market rebounds, even impressive ones, should be viewed with a healthy dose of skepticism.

  Charts by: StockCharts, Elliott Wave International

  

  

  

  

  

• Barry Diller: "If Trump Wins I'll Move Out Of The Country"

  IAC/Interactive Chairman Barry Diller spoke with Bloomberg’s Erik Schatzker about many things including the state of the TV industry, Tinder, and Jack Dorsey at the Bloomberg Markets Most Influential Summit in New York today. However, the one thing that caught our attention was the prominent Democrat’s characterization of what he would do if Donald Trump wins the presidential election.

  His quote:

  “If Donald Trump doesn’t fall, I’ll either move out of the country or join the resistance. I just think it’s a phenomenon of reality television as politics and I think that that is how it started. Reality television, as you all know, is based on conflict. All he is is about conflict and it’s all about the negative conflict. He’s a self-promoting huckster who found a vein, a vein of meanness and nastiness.”

  //

  The reality is that many, if not most US corporate executives, comfortable with the close relationship their money has with D.C. career politicians whom they know they can buy and manipulate without reproach, share Diller’s sentiment.

  Which is why one wonders if despite all his various misgivings, having Trump in the oval office may well be worth if only for the mass exodus of all those who have co-opted US democracy, who have equated corporations with people, who have put the “crony” in crony capitalism, and who have been the sole beneficiaries of the $3 trillion in Fed asset purchases to date, purchases which are set to continue shortly.

  

  

  

  

  

• Oct 7 – IMF Warns On Worst Global Growth Since Financial Crisis

  EMOTION MOVING MARKETS NOW: 30/100 FEAR

  PREVIOUS CLOSE: 32/100 FEAR

  ONE WEEK AGO: 13/100 EXTREME FEAR

  ONE MONTH AGO: 10/100 EXTREME FEAR

  ONE YEAR AGO: 5/100 EXTREME FEAR

  Put and Call Options: NEUTRAL During the last five trading days, volume in put options has lagged volume in call options by 30.48% as investors make bullish bets in their portfolios. This is a lower level of put buying than has been the norm during the last two years and is a neutral indication.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 19.40. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: FEAR The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating fear.

   

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC) | 10 YR T NOTE | 2 YR T  NOTE | 5 YR T NOTE | 30 YR TREASURY BOND| SOYBEANS | CORN

   

  MEME OF THE DAY – BEIJING AFTER VOLKSWAGEN

   

  UNUSUAL ACTIVITY

  FOLD .. JAN 9 and 10 CALLS on the offer

  MDT activity in the NOV 72.5 CALLS

  FUND  Senior Portfolio Manager P    18,231  A  $ 5.9175

  LPCN – President and CEO P    2,000  A  $ 12  P    700  A  $ 11.6799 P    1,300  A  $ 11.676

  More Unusual Activity…

  HEADLINES

   

  IMF warns on worst global growth since financial crisis

  IMF: Fed should wait for firmer inflation before hiking

  IMF sees China slowdown risks, urges Beijing to float yuan

  EIA raises 2015 global oil demand forecast

  Opec sees oil market stabilising, says low prices will not persist

  CA Ivey Purchasing Managers Index SA Sep: 53.7 (est 54; prev 58)

  ECB Liikanen: ECB should avoid hasty QE action, stay patient

  Fonterra dairy prices +9.9%

   

  GOVERNMENTS/CENTRAL BANKS

  IMF warns on worst global growth since financial crisis –FT

  IMF: Fed Shld Await ‘Firmer Signs’ Infl Rising Before Liftoff –MNI

  Atlanta Fed GDPNow Forecast 1.1% (prev 0.9%)

  ECB Liikanen: ECB shouldn’t take hasty policy response to recent inflation decline –BZ

  Ifo: Eurozone Recovery Driven By Domestic Demand

  EU to close tax loopholes for multinationals –CNBC

  UK FCA Introduces New Rules On Whistleblowing

  Fitch: Portugal Vote Means Policy Continuity but Some Risks

  RBA satisfied Australia’s economy ‘weathering the storm’ –AFR

  TPP : With deal’s details still a mystery, Japan parliament unlikely to meet –Nikkei

  FIXED INCOME

  US sells 3-year notes at 0.895% vs 0.901% WI –ForexLive

  Treasury yields turn lower after IMF cuts global-growth outlook –MW

  COMMENT: Has Liquidity Risk in the Treasury and Equity Markets Increased? –NY Fed Liberty Street Economics

  FX

  EUR: EURUSD shows first 55DMA/200DMA Golden Cross in 16 mths –Laidi

  SWIFT: Yuan overtakes Japanese Yen as world?s 4th largest payment currency –People

  IDR: Indonesia?s Rupiah Logs Biggest One-Day Gain In Over Six Years –WSJ

  ENERGY/COMMODITIES

  WTI futures settle +4.9% at $48.53 per barrel

  Brent futures settles +5.4% at $51.92 per barrel

  Oil rises, as market eyes less U.S. output, Saudi-Russia talks –Rtrs

  Opec chief: Could See 2016 Non-OPEC Supply Growth Of Zero Or Negative –Rtrs

  Opec: Global Oil to Cut Spending by $130 Billion –WSJ

  EIA: Crude Output to Fall Through mid 2016, Price Outlook Same –MNI

  IEA’s Birol: Oil upstream investment drop is biggest in history –Rtrs

  EQUITIES

  EARNINGS: PepsiCo revenue beats as North America sales rise –CNBC

  EARNINGS: Strong dollar drags on SABMiller earnings –FT

  M&A: AmerisourceBergen buys Pharmedium Healtchare for $2.575bn –Biz Wire

  M&A: Suncor seeking to win over investors on Canadian Oil Sands bid –BBG

  M&A: Johnson Controls is in early stage talks to buy EnerSys –DJ

  GREECE: Greece’s Piraeus Port Sale Delayed A Few Weeks –Rtrs

  FUNDS: Bain to liquidate $2.2bln absolute return capital fund –BBG

  CONSUMER: Tesco And Fraud Office Hold Talks Over Deal –Sky

  TECH: EU says Facebook Data Transfer Deal Invalid –Sky

  AUTOS: VW scandal: staff told all carmaker’s investments are under review –Guardian

  C&E: Shell boss sees signs of oil price recovery but warns of ‘spike’ –Guardian

  C: DuPont Co. chief Ellen Kullman will retire at mid-month, company says –NJ

  M&A: Irish central bank opposes takeover of forex broker Avatrade –ForexLive

  LetterOne in talks to acquire Eon oil and gas assets –FT

  Bombardier offered to sell majority stake in troubled CSeries program to Airbus, sources say

  EMERGING MARKETS

  IMF sees China slowdown risks, urges Beijing to float yuan –Rtrs

  Polish Central Bank Holds Rates, As Expected –Nasdaq

   

  Fitch: Lower Russian Bank Capital Ratio Would Be Credit Negative

  

  

  

  

  

• Earnings Still Matter

  From the Slope of Hope: Many years ago, if you asked someone what drove stock prices, they would give you a simple, honest answer: earnings. If a company had strong earnings, and those earnings were projected to grow, then the stock price was strong. If not, then not.

  Take a time machine back to that same person and tell them about the new world in which what drives stock prices is the USD/JPY. Yep, the ratio of the US dollar to the Japanese Yen is what everyone follows, pip by pip (tonight being yet another example, as everyone is tied up in knots as to what that chortling buffoon Kurado is going to announce). What the USD/JPY has to do with honest-to-God equity value is beyond me.

  In spite of this, earnings still matter, and as we head into another earnings season, the bulls better pray to whatever pagan gods they worship that company after company magically defy the downturn that the economy is quite obviously entering. It isn’t off to a good start this evening, however, as the charts below show.

  First off, there is YUM, which is the organization that owns the fine dining establishments Kentucky Fried Chicken, Taco Bell, and Pizza Hut. I guess even the morbidly obese typical American gastropod has had his fill over low-quality, over-salted, over-greased crap that these dreadful little venues crank out, as the stock has lost nearly one-fifth of its market cap after hours (after having already dropped substantially in recent months):

  

  Software make Adobe is having a relatively gentle time of it, as its percentage loss is (as of this writing, at least) still confined to the single digits. All the same, it’s pretty ugly out there.

  

  These are just two companies out of the thousands that will be reporting in the weeks ahead. Let’s hope this is representative of plenty of bad news to come.

  

  

  

  

• SocGen Models A Chinese Hard-Landing; Sees The S&P Crashing 60%

  Now that even permabulls are openly discussing a recession as a possibility for the US economy, a comparable and far more dire scenario is making the mainstream rounds: a China hard-landing.

  Earlier today, SocGen decided to model out what what would happen to equities in just such a scenario. In fact, it took it one step further and combined this with what an “EM lost decade”, one which increasingly looks more realistic, would look like.

  This is what it found:

  Our model indicates the US equity market could potentially drop by 30% in the event of an ‘EM lost decade’ and by 60% in the event of a China hard landing (i.e. S&P 500 back to its lows).

  The silver lining will depend on just how aggressive the response to such a collapse will be:

  The amplitude of the correction would be a function of the policy response. In both scenarios, we think global equities would rebound strongly after
  having overshot (i.e. equities to price in a more optimistic scenario).

  SocGen then provides the following seven investment recommendations for what would be more or less an apocalypse for risk assets:

  

  While the above are largely self-exlanatory, SocGen adds the following explainer:

  The 2015 summer sell-off highlighted how nervous the markets are regarding any risk coming from China: the S&P 500 index lost 11% in one week, the Eurostoxx 50 fell 16% and the Nikkei was down 13%. Whatever the scenario (hard landing or EM lost decade), if China’s GDP growth were to drop by c. 2% between 2015 and 2016, volatility would jump and the equity market would price in a lack of future growth (i.e. via a spike in the risk premium).

  

  And some more details:

  ‘EM lost decade’ scenario: a square root-shaped equity market

   

  Stressing our equity risk premium model indicates that the S&P 500 could potentially drop by 30% to 1400pts due to a strong move in the risk premium during 2016. In such a scenario, the market could quickly rebound (by year-end 2016) in line with commodity prices. We would expect support from central banks and the resilience of the US and European economies to support developed equity markets, which should gradually recover, albeit to a lower level. We thus imagine a square root-shaped scenario in which European equities would underperform US equities, but would then rebound stronger (on the back of a lower oil price, weaker currency, a more aggressive ECB and more attractive valuations).

   

  ‘Chinese hard-landing’ scenario: a V-shaped equity market trend

   

  In our hard-landing scenario, a theoretical drop in China’s GDP growth from 6.9% in 2015 to 3.0% in 2016 and its consequences would have a major impact on global corporate earnings. We would expect a sharp sell-off of global equities in such a scenario. Our risk premium model indicates that the S&P 500 could in theory return to its lows (around 800pts). But then again the deflationist shock could prompt the central banks to turn more aggressive and support the equity markets to prevent the S&P 500 from sliding into such a bear market. We think that after such a shock the global equity market would rebound strongly on a return to growth in China and central banks actions.

  * * *

  So while hardly coming as a surprise to anyone, the resultant devastation across global equity markets will mean that more than even a US recession, this explains why the Fed’s 4th mandate is precisely one that focuses on both Chinese markets and the economy, because suddenly the Fed has realized that the biggest risk to the S&P 500 is not domestic, but one stemming from China whose jugging of a real estate, credit, investment, banking and equity bubble will surely take up all the Fed’s resources in the coming years.

  

  

  

  

  

• Silver Coin Premiums Soar Above 50%

  Courtesy of Sharelynx’ Nick Laird who tracks precious metal premium by vendor, we continue our recent series showing the discrepancy between paper and physical metals, in this case silver. As Nick notes, APMEX price premiums are a lot higher than the Monex. And as can be seen in the charts below, premiums rose above 50% for 1-19 coins & above 40% for 500 plus coins.

  

   

  For now, gold is stable.

  

  

  

  

  

  

• Biotechs Butchered As Oil Orgasms In Otherwise Uneventful Day

  Update: both YUM and ADBE are crashing at this moment, the first down 16%, the second down 11%, after both admitted they had been “overoptimistic” and cut and guided lower. YUM Q3 revenue was $3.43bn, vs Exp. $3.66bn and EPS was $1.00 vs Exp. $1.06, while ADBE said it now expecteds EPS of $2.70 vs previous expectations of $3.20, on revenue of $5.7bn vs $5.94bn prior.

  ***

  After soaring some 100 points since the terrible Friday payrolls data, and nearly 6% in the past week…

  

   

  … today the S&P went very much nowhere, even despite yet another solid push in the USDJPY overnight…

  

   

  … which was subsequently picked up by the 5Y as the correlation between TSYs and equities promptly became dominant while the announcement of the 12% cut in DuPont EPS served to push the stock as much as 12% higher on hopes the company will promptly agree to become the latest actvist fodder, one which will issue billions in debt to fund stock buybacks.

  

   

  All throughout the day, the dollar index (DXY) continued to slide, and closed at the LOD, rapidly approaching the pre-FOMC level.

  

  But the real story of the day was the bifurcation between momo stocks, manifested in this case by biotechs which were mauled once again, tumbling over 6% at the lows, and down 24% from the recent highs, closing fractionally down for the year…

  

   

  … and crude oil, which soared over 6% from the day lows without a clear catalyst although there was speculation that geopolitical risks out of Syria where US and Russian planes are literally within dogfight distance, are finally catching up to oil traders.

  

   

  But perhaps the biggest, and most under-reported story, remains the unexpected demand for safety in the shape of 3Month bills, whose yields tumbled following the FOMC and have been increasingly negative in the days since, closing at -0.005%. Is the bond market really hinting at NIRP?

  

  And now all eyes to the BOJ when tonight around 11pm Eastern, Japan’s central bank is expected do and say precisely… nothing. After all, as we explained, this is the last bullet both the BOJ and the ECB have, and they will delay as long as possible before boosting QE, and would much rather leave the heavy lifting to the Fed.

  

  

  

  

• Prominent Permabull Says Correction Not Over Yet, Expect "Final Capitulation"

  Back in January 2012, all was well with the centrally-planned world: Gluskin Sheff’s David Rosenberg was staunchly bearish, while his arch-nemesis, Wells Capital’s Jim Paulsen, was the opposite. This rivalry culminated with Rosenberg writing an extensive breakdown of his showdown with “bullish strategist” Paulsen at a CFA event (see “David Rosenberg Explains What (If Anything) The Bulls Are Seeing“) in which he said that the one thing that he could “identify as market positive” was valuations, to wit: “we do understand that P/E ratios at current low levels do serve up a certain degree of confidence that there is some downside protection to the overall market here.”

  Fast forward three years, and the world, while still centrally-planned more so than ever now that the BOJ has and the ECB is about to join the massive monetization fray, has been thrown into conventional wisdom turmoil. The reason is that while David Rosenberg infamously flip-flopped from bear to bull (although supposedly he may be contemplating turning bearish again, though who knows after the last 3-day rally) three years ago, none other than permabull Jim Paulsen has come out with a very uncharacteristic and skeptical assessment of the market, in which he does not urge readers of his monthly letter on economic and market perspectives to yet again go all-in and BTFD, but to instead realize that the correction is not yet over and that he expects “a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery.“

  First, Paulsen’s take on the torrid market rally unleashed by the worst jobs report in years:

  Finding a bottom in the stock market may well be a fool’s game, but that does not stop us fools from trying. A strong rally last week accentuated by a surprisingly weak jobs report on Friday allowed the stock market to successfully retest its initial August correction low for the second time. This show of technical strength has buoyed expectations of a coming year end market rally.

   

  While equities may be finding renewed upward momentum in the current quarter, our guess (and it is just that) is the stock market correction is not yet over. In our view, a quick recovery back near all-time highs would leave the stock market with many of the same vulnerabilities that started the correction. Consequently, we would not be surprised if the stock market tests its correction low yet again and perhaps even fails before reaching a final bottom.

  Paulsen addresses what he views as the four main challenges for the market:

  Despite the weak jobs report last week, the U.S. unemployment rate remains poised to fall below 5 percent within months. Consequently, even modest economic growth can now produce wage and price pressures, mandate higher interest rates, lower both stock and bond valuations and force Wall Street to finally wave goodbye to its great liquidity friend. Simply reviving Chinese economic growth or bottoming commodity prices may not end this stock market swoon. Today’s turbulence is more about correcting market vulnerabilities built up over the past six years, and finding a new foundation that will allow this bull market to resume as the U.S. economy moves toward full employment.

   

  In our view, the stock market faces four major challenges.

   

  First, in recent years investors have become more calm and confident than at any time in this recovery. Undoubtedly, investor confidence has cracked a bit during this correction. Some quantitative measures of investor sentiment now suggest bearishness (a positive for the stock market).

   

  However, while debatable, our current qualitative assessment of investor mindsets is that they remain fairly constructive about the future. Most media stories are not preaching the end of the world and most Wall Street strategists have maintained bullish year end targets. Moreover, financial market action is not consistent with real fear. There has been no huge and sustained rush to the safe haven U.S. treasury, U.S. dollar or gold. Finally, cyclical stock sectors have done as well or better than traditional defensive sectors in the last couple months. Industrials, consumer discretionary and emerging market stocks have been outperforming in the last couple months. Since its start, the premise behind this bull market has been “climbing a perpetual wall of worry”. Today, though, rather than  a risk, most seem to perceive the current correction more as a buying opportunity in an ongoing bull market. Once this correction finds its final bottom, we suspect many more investors will likely fear a full-fledged bear market and a heightened risk of recession.

   

  Second, at its recent peak, the trailing price-earnings multiple on the U.S. stock market reached almost 19 times earnings and is still about 17.6 times today. Trading at 19 times earnings in a recovery with a zero interest rate, low and stable inflation and no cost-push pressures is not problematic. However, the stock market is likely to go searching for better valuation support if the normal tensions associated with a recovery nearing full employment begin pressuring the financial markets.

   

  Third, after six years, the U.S. earnings recovery is showing signs of aging. Profit margins are near all time record highs  and compared to the last few years, earnings are likely to grow much more slowly during the balance of this recovery. Since profit margins cannot rise much higher, should sales  growth remain tepid so will earnings results. Alternatively, should sales growth accelerate, pressures on profit margins are likely to intensify nullifying much of the positive impact of stronger economic growth and keeping earnings performance tepid.

   

  Finally, whether it is this year yet or in 2016, the U.S. is imminently headed toward an interest rate reset. Does the current relatively high price-earnings multiple, an investment community which mostly perceives the correction as a great buying opportunity, a recovery with amazingly weak productivity and an aging corporate earnings cycle represent a good foundation for stocks to withstand a rate hike?

  Where does Paulsen see the market heading in the near-term:

  Most likely, the contemporary bull market is not over. However, the current correction may prove deeper and longer than most now expect. Should the stock market quickly return to its recent highs, the vulnerabilities that produced this correction will remain challenging.

   

  * * *

   

  Maybe the S&P 500 declines below 1800 before this correction finds a final bottom. A second break below the initial crash low in August would produce widespread fears of recession and calls for the end of this bull market rather than the popular “buy on the dip” mentalities recently evident. Moreover, and perhaps most importantly, near 1800, the S&P 500 would be selling about 15 times trailing earnings (close to its long-term 145 year historical average), which represents a much more sustainable level in an economy facing slower earnings growth, somewhat higher inflation and rising shortterm and long-term interest rates.

   

  Admittedly, there is nothing scientific about 15 times earnings. Perhaps, the stock market will find good support at 16 times or maybe it will need to fall to 14 times? Who knows? It is guesswork at best. However, we think the stock market still faces some vulnerability and until it achieves a better fundamental footing, it is not likely to sustain a meaningful advance.

  As a reminder, it was none other than David Tepper who one month ago infamously lowered his own “fair value” P/E multiple from 18x to a range of 14x-16x, noting that under these parameters the S&P 500 would trade between 1680 and 1920 within the next six to twelve months, or 1800 at the mid-point, using a $120 2016E EPS. We wonder if Paulsen was listening…

  Finally, Paulsen’s summary:

  The strong stock market rally during the last few days has pushed the S&P 500 near its highest closing level since the correction began in late August. This has boosted optimism that the recent selloff may be ending. While this could certainly prove to be the case, we remain less sanguine that the vulnerabilities, which initially produced this correction, have yet to be resolved.

   

  Ultimately, we expect a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery as the economy nears full employment.

  So to summarize, among the more prominent recent (perma)bull to bear conversions we have Tepper, Icahn, Gundlach and now, arguably, Paulsen, who may not be “bearish” but who clearly is not a happy buyer here. On the other hand, the bulls are Gartman and Cramer. Trade accordingly

  

  

  

  

  

• Glencore Explains What Would Happen If It Is Downgraded To Junk

  As part of its ongoing scramble to defend itself against “speculators” and concerns about its balance sheet, earlier today Glencore released a 4 page “funding worksheet” detailing all of its obligations.

  Among the highlights was Glencore’s disclosure of total available liquidity as of this moment, which the firm reported to be materially above its June level of $10.5 billion:

  At 30 June 2015, available committed liquidity was $10.5 billion (p. 71 of 2015 Half-Year Report). As of today, committed available liquidity is materially above June’s level, given the recent $2.5 billion equity placement, the business generating positive free cashflow and the ongoing focus on delivery of the various other debt reduction measures, including lower net working capital. Further delivery of the debt reduction programme, including the $2 billion target for asset disposals, will similarly enhance liquidity levels.

  It also presented its sources of funding among which the well-known $31.1 billion in bonds, as well as $20 billion in short-term funding split between a $15.25 revolver (of which a “substantial portion” is undrawn), $1.2 billion in AR/Inventory secured funding, and $3.4 billion in bilateral bank facilities. Glencore was quick to point out the gullibility of its bank lenders: “No financial covenants, no rating events of default or rating prepayment events, no material adverse change events of default or material adverse change prepayment events.”

  Next Glencore details the terms of its notes and cross-guarantees which it lays out as follows:

  $36.5 billion notes outstanding at 30 June 2015, including $1.9 billion maturing in October 2015. See Appendix for full details.

  • Notes are issued on a pari passu basis, applying a cross guarantee structure introduced at the time of the Xstrata acquisition (see Moody’s and S&P reports dated 7 May 2013 and 19 June 2013, respectively).
  • Glencore Group bonds (issued by Glencore Funding LLC, Glencore Finance (Europe) AG and Glencore Australia Holdings Pty Ltd) have guarantees from Glencore plc, Glencore International AG and Glencore (Schweiz) AG (previously Xstrata (Schweiz) AG).
  • Following the Xstrata acquisition, legacy Xstrata bonds (issued by Xstrata Finance (Canada) Limited, Xstrata Canada Financial Corp, Xstrata Canada Corporation and Xstrata Finance (Dubai) Limited) also now have guarantees from Glencore plc and Glencore International AG, implemented by way of supplemental indentures.
  • Similarly, the outstanding USD notes issued by Viterra Inc. in August 2010 have guarantees in place from Glencore plc and Glencore International AG.

  Glencore also notes the $17.9 billion in Letter of Credit commitments it had outstanding as of June 30:

  As part of Glencore’s ordinary sourcing and procurement of physical commodities and other ordinary marketing obligations, the selling party (or Glencore voluntarily) may request that a financial institution act as either a) the paying party upon the delivery of product and qualifying documents through the issuance of a letter of credit or b) the guarantor by way of issuing a bank guarantee accepting responsibility for Glencore’s contractual obligations.

   

  The LC is not incremental exposure to that already reported in the financial statements. An LC is only a “contingent” obligation, disclosed as such in Glencore’s financial statements i.e. becomes a liability in the event that Glencore does not perform on an already recorded liability. The underlying transaction / procurement liability is recognised within “Trade Payables” in Glencore’s balance sheet. At 30 June 2015, $17.9 billion of such LC commitments have been issued on behalf of Glencore, with the respective liabilities reflected within the $28.1bn of recorded accounts payables. The contingent obligation settles simultaneously with the payment for such commodity. Availability is substantially higher, such that the vast majority of these Glencore facilities remain undrawn.

  An interesting tangent is when Glencore discusses it readily marketable inventories:

  Represents those marketing inventories that are contractually sold or hedged. At June 30 2015, total inventories were $23.6 billion, of which Marketing RMI were $17.7 billion.

   

  For corporate leverage purposes Glencore accounts for RMI as being readily convertible to cash due to their very liquid nature, widely available markets and the fact that price exposure is covered by either a forward physical sale or hedge transaction.

  Which brings up the very interesting question: with Glencore touting its revolver availability, and its various secured facilities, just how is Glencore marking the fair value of its inventories, because a ton of copper a year ago as collateral is worth just a little bit more than a ton of copper currently. We are confident Glencore’s banks are aware of this.

  But finally, and most importantly, Glencore presents what it believes would happen if it is downgraded from Investment Grade to Junk. This is what it says:

  Glencore is undertaking measures to strengthen its balance sheet, including a material debt reduction, that the company expects shall serve to protect and maintain a strong BBB/Baa credit rating.

   

  In the event of a downgrade by Standard & Poor’s and/or Moody’s from current ratings to the level(s) immediately below, a ratings’ grid in the $6.8 billion 5-year revolving credit facility provides for a modest additional margin step-up. As this 5-year revolving credit facility is expected to remain fully undrawn, the net additional effect would only be 35% of this modest step-up margin, being the applicable commitment fee only. The maximum margin for sub-investment grade rating from either Standard & Poor’s or Moody’s is 1.10%. There is no ratings grid in relation to the $8.45 billion revolving credit facility. In addition, there are $4.5 billion of bonds outstanding, where a 125bps margin step-up would apply, in the event that the bonds were rated sub-investment grade by either major ratings agency.

  Which reminds us of the waterfall analysis being shared around in the weeks before the AIG downgrade unleashed a series of events that ultimately led to the insurance company’s bail out. It too presented glowing picture of the potential risks. In the end it was very deficient. One can only hope that Glencore has learned the lesson of never misrepresenting the worst case scenario.

  Full letter below (link)

  Glencore Funding

  

  

  

  

  

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